Port Businesses – Three Years After the Enactment of the 2008 Shipping Law
As a part of its efforts to boost and reform the maritime industry in Indonesia, the Government has issued Law No. 17 of 2008 on Shipping (“Shipping Law”). Three years after its promulgation and less than one month before the approaching 7 May 2011 deadline set out in the Law, despite the noble reasoning behind its issuance, the Shipping Law appears to have left some aspects inconclusive.
While the principles of the changes are mostly celebrated by maritime businesses in Indonesia, several articles are not effective in implementing the spirit of the Shipping Law and the Government is having a tough time ensuring the implementation of the principles. For instance, port businesses, especially ones with existing or proposed business in ports currently “owned” by Pelindo, are bewildered on how existing port businesses should proceed with their concession and/or land utilization agreement with the four Indonesian port corporations (“Pelindo”) I-IV after the full implementation of the Shipping Law. There is still a policy vacuum on the implementation of several aspects of the law, e.g. how to calculate port assets as a result of the change in the role of Pelindo from “regulator” to “business player/operator.” There is no clarity on how new port businesses should be established on existing land where the right to manage (HPL) is held by Pelindo, the regional government, or other government related bodies.
To help better understand the issue, below is a brief explanation on how the port business was regulated under the previous shipping law regime.
The New Shipping Law: What is in it and How it Works
On 7 May 2008, the Government of Indonesia issued the Shipping Law. While the title appears to only cover the shipping business, it is actually an umbrella law that regulates the entire maritime industry in Indonesia.
By issuing the 2008 Shipping Law, the Government aimed to reform the maritime idustry in Indonesia. For the largest archipelago nation in the world, Indonesia does not have a sufficient or efficient port systems and has a shortage of Indonesian flagged vessels. Many believe that these are contributed to by the long-held legislated monopoly in port services by Pelindo, a lack of motivation to use Indonesian vessels, and a lack of certainty of being able to enforce vessel security in ship financing.
The underlying principle of the Shipping Law is to separate the role of the Government, as a regulator and an operator. Thus, under the Shipping Law, the Government (through the Port Authority) will only act as a regulator. It will then license the private sector (with a port business license – “Badan Usaha Pelabuhan” license) as well as state owned enterprise such as Pelindo to operate and manage ports. With the issuance of the Shipping Law, the Government removed Pelindo’s monopoly right manage ports.
In addition to the separation of roles and to support the cabotage principle that is also contained in the law, the Shipping Law provides more assurance to banks and financiers in secured shipping transactions by acknowledging maritime liens and the ability to enforce grosse deed to seize a vessel without the requirement to obtain prior court injunction.
This essay will discuss only the removal of Pelindo’s monopoly rights and the effects on current and new port business actors, especially those who have ports or plan to build ports on Pelindo’s current right to manage land (Hak Pengelolaan or “HPL” – a special land title for government entities or state owned enterprises). Other changes introduced in the Shipping Law such as the cabotage principle and maritime lien will be discussed in future essays.
Removal of Pelindo’s Monopoly
Under the previous law, Pelindo was given a monopoly right to manage and operate ports and as a result of such this right, has the ability to grant concessions to its partners to operate ports. Pelindo was also granted the HPL of the major ports in Indonesia.
Previously, companies wishing to enter into the port construction and operation business had to enter into a joint venture with or obtain a concession from Pelindo. Under these arrangements, companies, or the joint venture bodies, commonly signed land utilization agreements and/or authorization agreements with Pelindo. The agreements would stipulate that Pelindo would provide land and certain infrastructure, and receive royalties and profit sharing in return. On the other side, the company or the joint venture body would provide supra-structure, heavy machinery, and certain technical experts, and receive profit sharing in return. Upon the expiration of the agreements, titles of the supra-structure and heavy machinery that was procured by the companies or the joint venture bodies would be transferred to Pelindo in exchange for compensation as set out in the agreements.
Under the Shipping Law, Pelindo no longer has a monopoly right to the port business and acts merely as another port operator, just like any other private company.
The Shipping Law provides that the Port Authority (for commercially operated ports) and the Port Administrator Unit (for non-commercial ports) will be the party responsible for operating and managing ports. The Port Authority and the Port Administrator Unit will also be granted the right to manage (HPL) to the land of the port, which under the previous law was held by Pelindo. In commercially operated ports a port business entity can obtain a concession to operate and manage ports from the port authority.
The Government, regional government, and state owned enterprises were granted a 3 year transition period to “adjust” port business operations to comply with the provisions of the 2008 Shipping Law. This 3 year period was meant to give the Government sufficient time to consider the best way to develop port businesses and relevant state owned enterprises in Indonesia in accordance with the Shipping Law. Within this period, they were meant to, among other tasks, evaluate and perform a full audit of the assets of state owned entities that operate ports (Pelindo). These calculations should be completed by May 2011.
The Shipping Law also provided one year after the enactment of the Shipping Law for the Government to establish the required Port Authority and Port Administrator Unit.
Agreements or cooperations that have been entered into by Pelindo and its partners before the enactment of the law will be upheld. Their performance will, however, be made in accordance with the Shipping Law.
The Issue: Port Authorities and the Commencement of the Port Asset Audit
After a year of delays, the Government finally established port authorities in Belawan Medan, Tanjung Priok Jakarta, Tanjung Perak Surabaya, and Makassar on 20 December 2010. It is understood the these authorities have coordinated with Pelindo and the Finance and Development Supervisory Board (Badan Pengawasan Keuangan dan Pembangunan / BPKP) as the auditor to commence the port asset calculation and valuation required under the Shipping Law (the “Audit”) with a view to complete it before May 2011. The calculation is made to understand which assets were developed by Pelindo and therefore will continue to be owned by Pelindo, and which assets were granted by the Government to Pelindo. Assets that were granted will be returned to the Port Authorities.
The problem, however, is that there have been no regulations to confirms or clarify:
1. How to determine/map which assets are really owned and developed by Pelindo and,
2. Which were granted to Pelindo under the previous regime, and Which current assets, the most important being the HPL of the land, will be transferred to Port Authorities, and
3. The method to perform the transfer of assets.
Port Authorities and Pelindo will react only after the Audit is completed. It is only natural that Pelindo will aim to negotiate the terms of the transfer in its favor.
Further to the above, it is also interesting to know how port authorities will view the role of third party investors/ companies in the ports currently “owned” by Pelindo. Will Port Authorities automatically grant Pelindo the right to be the operator (even though it is no longer the owner) of the relevant port after the Audit? By designating Pelindo as an operator, third parties will only continue as subcontractors of Pelindo. If this is the case, there will not be much change in terms of the port business climate in Indonesia. Under the currently elaborated circumstances, Pelindo will continue to sustain its monopoly as it already owns and operates the biggest and most important ports in Indonesia. Eager investors can only look at ports in new locations and generate new traffic to the locations if they want to be an operator, not only a subcontractor of Pelindo.
Port operators who were previously granted concessions by Pelindo are still waiting for answers on whether they need their concession agreement to include Port Authorities as a successor of Pelindo or whether the concession agreement will remain. Most likely, they will need to amend their land utilization agreement, since the HPL title of the land will be transferred to Port Authority.
To materialize the principles set out in the Shipping Law and change the port business climate in Indonesia, the outcome of the calculation and further negotiation between Pelindo and the Government must be in favor of private port operators, in which existing private port operators must be given the opportunities to continue their concessions as partners of Pelindo, and not merely as subcontractors. At the expiration of existing concession agreements, these private port operators must have the same opportunities as Pelindo to compete for new concession from the Port Authorities. All HPL land must be transferred to the Port Authorities and new concessions must be made with the Port Authorities.
Meidi Hutagalung is a lawyer in Premier Law Alliance (www.premierlawalliance.com) and a consultant in Investindo, a non-advisory legal services company (www.investinginindonesia.com).
